Forecasting Crashes: Correlated Fund Flows and the Skewness in Stock Returns

Abstract

This paper uses the correlation of money flow among mutual funds to forecast the skewness of stock returns. We show that asset returns are highly negatively skewed when their mutual fund owners experience correlated liquidity shocks. In addition, stocks with high mutual fund ownership are more “crash prone”, whereas the returns of stocks with concentrated ownership tend to display more positive skewness.